China's planned economic reforms are poised to reshape the competitive landscape, allowing private companies such as Alibaba Group Holding to compete with state-owned banks and easing the one-child policy to bolster demand for products from Nestlé? SA to General Motors.
Plans to change the nation's financial sector include a new registration system for initial public offerings and allowing qualified private investors to set up small-to-medium sized banks. Tencent Holdings, Asia's biggest internet company, is part of a group applying for a banking licence in China.
"Companies that got too comfortable with the old system now are going to have to change," said Tim Condon, chief Asia economist at ING Financial Markets in Singapore, who previously worked for the World Bank. "This is potentially a huge step forward in opening up the economy."
President Xi Jinping's reforms, which may be the most sweeping since Deng Xiaoping's liberalisation in 1978, are aimed at giving more influence to market forces and loosening government controls. The changes outlined in a 60-point document after a Communist Party meeting last week present opportunities – and risks – to companies in almost every segment of the world's second-biggest economy, which is heading for its weakest annual expansion since 1999.
China's stocks rose on Monday, with the benchmark index for mainland companies in Hong Kong surging 5.6%, the most since December 2011. It rose as much as 2.1% today. Hong Kong's Hang Seng Index yesterday jumped 2.7%, the most in more than 10 months, and advanced as much as 0.8% today.
The Shanghai Composite Index gained 2.9% yesterday and rose as much as 0.3% in morning trading today.
"It's positive, very positive for sentiment," said Catherine Yeung, investment director for equities at Fidelity Investment Management in Hong Kong. Fidelity is adding more Chinese consumer-related stocks, including internet and health-care companies, she said, without being more specific.
Policy makers will seek to reform a registration system for IPOs, according to the government statement. That may hasten the approval process for the more than 700 companies awaiting regulatory permission for their share sales.
The leaders also decided during the four-day meeting – known as the third plenum – to further increase the share of direct financing in the economy such as stock and bond sales, according to the government's November 15 statement.
The Communist Party's meeting that ended November 12 is set to have a similar historical significance as the one in 1978 when Deng decided on a reform and opening-up policy that heralded three decades of rapid growth, said Yao Yang, dean of the National School of Development at Peking University.
Diapers and milk
Grabbing headlines was the policy shift allowing couples to have two children if either parent is an only child, easing the rule which required that of both parents.
The relaxation could boost Chinese demand for diapers, infant milk powder and other baby-related sectors, according to Summer Wang, an analyst at Bank of Communications. The one-child policy has left China with an aging population and a shrinking pool of young workers.
Of China's 1.36-billion population, 17.1% are aged below 15, compared with India's 28.5%, Brazil's 25.4% and Russia's 15.9%, according to data compiled by Bloomberg.
Shares of infant-formula sellers, milk processors and other baby-product makers surged yesterday. Diaper maker Hengan International Group rose 6.5% to a record in Hong Kong before declining today. Stroller and crib maker Goodbaby International Holdings, China Mengniu Dairy, China Modern Dairy Holdings and Yashili International Holdings had also climbed in yesterday's trading.
Nestlé?, the world's biggest food maker, said Greater China is its fourth-largest market with annual sales of about 5.2-billion francs ($5.7-billion). The Swiss company has no comment to make about the new policy or how it might affect its business, Chris Hogg, a spokesperson, said.
Mengniu will increase the ratio of infant formula in its product offering, the company said.
The impact on demand may be seen only in 2015, and a study by the China Academy of Social Sciences implies the policy should add about one-million babies by then, Jessie Guo, a Hong Kong-based analyst at Jefferies, said by phone.
"If you have two kids, you are definitely more likely to have a car than if you have one," said Shen Minggao, head of China research at Citigroup in Hong Kong. Makers of appliances, clothing and shoes will also benefit as the new rules will boost rural income, Shen said.
US companies have been increasing their investments in the country. GM has committed this year to spend $11-billion in China by 2016 on new plants, products and people. Through joint ventures, the Detroit-based carmaker sold 2.84-million vehicles in the country last year and to sell five-million by 2015.
Mondelez International, the maker of Oreo cookies and Ritz crackers, is expanding a plant in Suzhou, one of eight manufacturing facilities in the country.
"We continue to invest in China to expand our routes to market, sales capabilities and innovation," said Michael Mitchell, a spokesperson for the Deerfield, Illinois-based company, declining to comment on China's new policies. "We remain optimistic about the future of China."
Yum! Brands, owner of the KFC and Pizza Hut chains, said it expects the Chinese consuming class to double to 600-million people by 2020.
"Our strategy is to build leading brands in China in every significant restaurant category," Jonathan Blum, a spokesperson for Kentucky-based Yum, said.
Billionaire Jack Ma, executive chairperson of Alibaba Group, has said China's financial sector needs an outsider to "stir things up," according to a transcript compiled by the official People's Daily.
Alibaba's entry to the lending business "should give the nationwide banks some concerns about future competition", said Jim Antos, an analyst at Mizuho Securities Asia in Hong Kong. "Private banks that can rely on technology to bypass the expensive and time-consuming job of building out a branch network could become significant competition for the commercial banks in only a couple of years."
Still, new entrants won't have the scale to challenge China's biggest banks in the next three-to-five years, said Chen Xingyu, a Shanghai-based analyst at Phillip Securities Group, which manages more than $22-billion of assets.
Among proposed changes are making budgets more transparent, improving transfer payments, setting up risk-warning and debt- management systems for central and local governments and speeding up legislation on a property tax.
The pledges included establishing market-determined prices for resources, boosting private-sector and foreign investment, and encouraging urbanisation by scaling back the hukou, or household registration system, to allow rural migration to smaller cities. The measures are to be implemented by 2020.
"China will become a high-income country under the leadership of Xi," Justin Lin, former chief economist for the World Bank and adviser to China's top leadership, said on November 17.
The country is also trying to bring in a market focus for commodity pricing. The plenum's proposals are negative for sectors including coal and power equipment, because of environmental protection initiatives, Citigroup's Shen said.
State-owned oil companies
China has typically used its state-owned oil companies, of which PetroChina is the largest, to control domestic fuel prices, and further pricing reform would only help their refining operations.
"More market-based pricing will raise costs for most consumers where the resource is currently undervalued," said Sijin Cheng, a commodities analyst at Barclays. – Bloomberg